New Year’s money resolutions: make sure your homeowners insurance is up to date

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The recent wildfires that devastated many U.S. communities illustrated the need for homeowners to make sure their insurance policies provide adequate coverage to repair or replace a disaster-damaged dwelling.

Too often, people buy a homeowners policy and then forget about it, never bothering to see if the payout amount has kept pace with construction costs, said Charlie Porter, an insurance agent in Menlo Park, Calif. "It's something people generally don't think about," he said. "They think, 'I have coverage, so I'm good.' That is not true."

In 2009, the California-based United Policyholders consumer group surveyed people who had been through wildfires that burned half a million acres and destroyed more than 1,500 homes in Southern California during 2007. About 70% of respondents said they were underinsured.

Don't expect to be bailed out.

If your policy doesn't provide enough coverage to fully restore your dwelling, you can't count on assistance from the federal government. That's because an increasing number of natural disasters has challenged the ability of the Federal Emergency Management Association to keep pace with the need.

If you're left holding a large home repair bill, you won't be able to convince your insurance company to bridge your coverage gap. It's your legal responsibility to make sure your homeowners policy is adequate.

Sean Scott, a fire restoration contractor and the author of The Red Guide to Recovery, recommends having two contractors estimate what it would cost to rebuild your home before you choose a policy amount.

"I would also ask for an estimate of what building code upgrades might be required, along with an amount for debris removal and demolition," Scott said. "Having this information will give you the ability to tell your agent how much coverage you want instead of the agent using some generic cost-per-square-foot formula that often leaves people underinsured."

Don't buy too much coverage, either.

While people tend to underinsure, it's possible for people to buy too much homeowner coverage. Some consumers mistakenly assume that they should be covered for an amount equal to their home's value on the real estate market. What they don't realize is that the land the home rests on won't need to be replaced after a fire. Your goal should be to have enough money to repair or your dwelling, not purchase another home.

To make sure your homeowners policy remains adequate over time, it's a good idea to monitor construction costs periodically. Although building costs are more stable than home prices, they can fluctuate, based on the price of labor and materials. It's a good idea to consult a local builder or restoration expert.

Find out what your possessions are worth.

It's useful to know how much it would cost to repair or rebuild your home, but don't forget about what's inside it. In order to get a handle on what your stuff is worth, create a home inventory that includes items of value in every room. Write down approximately what each item cost. (A photo of each room – and its contents – is a good way to document these belongings for insurance claims. Keep digital copies somewhere you can access them away from home, such as a cloud storage service.)

A home inventory will come in handy if you ever need to file a fire insurance claim, said the Rocky Mountain Insurance Information Association. If you have valuables, such as artwork or jewelry, ask your agent about your need for an insurance rider to protect items whose value may exceed the limits offered by a standard homeowners policy.

Understand how policies work – and whom they're protecting.

Standard homeowners insurance policies generally cover the replacement cost of your home and the actual cash value of your personal property. To determine actual cash value, adjusters factor in depreciation: A computer you bought for $1,200 five years ago may only be worth $600 now.

If you buy a full replacement policy, it will provide enough money to replace damaged possessions with ones of similar quality, without factoring in depreciation.

The Insurance Information Institute (III) says the price of replacement cost coverage for homeowners is about 10% higher than actual cash value, but it's generally is worth the investment.

Finally, remember that if you have a mortgage on your home, your lender will usually require you to buy a homeowners policy — but you can't rely on lending institutions to make sure your policy covers the full cost of repairing your home. Lenders generally require borrowers to carry only enough insurance to cover the amount of the outstanding loan.

Time for an annual insurance check-up.

The III recommends that at least once a year you make sure you have enough insurance to cover your dwelling and the possessions within it. It's also important to keep your policy up to date after you've made renovations to your home, said J.R. Duren, a personal finance expert at HighYa.com.

"If you've updated your kitchen and that update increased the value of your home, then get a new homeowners insurance quote that reflects that increase in value," Duren said.

In the end, you can't rely on anyone else to tell you how much homeowners insurance you should buy. The amount you need is a moving target that can change from year to year. It's up to you to determine what your comfort level is and to keep your policy updated.